Categories: Financial Advisors
      Date: Dec  8, 2011
     Title: Do As I Say, Not as I Did

It may come as a shock to you, but apparently some financial advisors have made mistakes with their own money. Some will even admit to their financial blunders--to family, friends, colleagues, or even clients. However, a financial advisor with an inclination to own up to his errors in personal financial management should probably think twice before coming clean in a New York Times article. Just ask Carl Richards.

Carl Richards is a Certified Financial Planner and investment manager in Park City, Utah (formerly located in Las Vegas, Nevada). He has developed quite a following for his "personal finance on a napkin" sketches and his personal finance blog posts at New York Times. (I truly look forward to seeing the latest sketch each week. But, really...who has time to read financial planning blogs?)

Experience is a hard teacher because she gives the test first, the lesson afterwards. -- Vern Law*

Richards' story is similar to millions of Americans'. He bought too much house in Las Vegas during the boom years. They borrowed too much off the equity to fund his business start-up, and live a bit better than they could really afford. After considerable soul searching, they stopped paying on the underwater home they could no longer afford, and eventually arranged for a short sale. You can hear Carl tell his story on a recent NPR Planet Money podcast.

Judging by the reader comments on the original article, Richard's struck a raw nerve for many people. Many cannot understand how a financial planner could make such mistakes, and still be an advisor. For example:

• "This article is incredible. The author isn't competent to manage his own financial affairs, and his job is advising other s how to manage theirs?"
• "The Times reaches a new low in the quality of its financial writers, and that's saying something. It's like it's a Times job requirement for them to manage their personal finances like a 7th grader."
• "The notion that Richards was, and still is, a financial advisor is an indictment of the entire industry. He is clearly incompetent. He made foolish choices based on avarice and now seeks to justify them."
• "My mechanic has more common sense about Finances. (No offense to my mechanic!) Wanna bet his next book and article is 'How I lost my Financial Business when I wrote about how stupid I was with my own Personal Finances in the NY Times'".

That is just a sampling of the negative comments fit to print. To be sure, there were also a number of readers who expressed positive sentiments. Many readers simply took the opportunity to tell a bit of their story of how the real estate downturn had affected them. And, a surprising number of humble folks took the time to explain how they were much better managers of their finances, much too wise, and much too moral to get caught in such a reckless fiasco.

Financial professionals have been debating the wisdom of Richard's mea culpa. Some believe he has harmed the profession and undermined the credibility of financial planners with the public. (Frankly, is that even possible?) Others see it as a breath of fresh air, and the start of number of useful conversations of how we all do stupid things with money, and how to avoid repeating them. I'm in the latter camp. The whole controversy has reminded me of the many mistakes I have made over the years, and how they have shaped the advice I give today. Just a few examples:

• I was in too big of a hurry to buy a house. I basically borrowed 100% at interest rates well above 10%. (It was the early ‘80s.) We should have been more patient, saved up a decent down payment, and waited for interest rates to drop to affordable levels.
• I didn't have the first house sold before starting to build the second house. It didn't sell, and we became accidental landlords. After a few years, we were able to finally sell, almost breaking even. Coming from California, I didn't realize you could lose money on real estate until then. Thankfully, my lesson was much less expensive than Carl's.
• While juggling two house payments, we had another child and I took a cut in pay due to the recession. We found out those house payments don't necessarily become easier over time. I discovered the wisdom of sufficient margin between your house payment and your income.
• Even though we had two children depending on us, we never had a will in place until much too late. We had plenty of excuses, but in retrospect this was really irresponsible.
• Too little life insurance. Too little emergency savings. Too much company stock. Too much stock in general.
• And, yes, even though I advise my younger clients not to do it--I borrowed money to buy cars. (It would have been easier to save up for them if I hadn't been paying on two houses. One mistake begets another.)

"Experience is a brutal teacher, but you learn. My God, do you learn." - C.S. Lewis

It just could be that our ability to learn from our own mistakes, and the mistakes of others, is the best thing financial planners have going for them. I thank Carl for encouraging me to reflect upon my past experiences, and reminding me to not be so darn smug and self-righteous about the "right way" to handle personal finances. Hopefully, financial advice delivered with a little more humility and a lot more understanding will be more acceptable, and ultimately more effective at improving the lives of clients.

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*Yes, the Vern Law from Meridian, Idaho. The Cy Young Award winning pitcher with the Pittsburg Pirates is also credited with saying, "A winner never quits and a quitter never wins." Who knew? I thought Coach Manship at Ladera Vista Junior High made that up.